The First Price of the Day

Abstract

The opening trading session is arguably the most crucial of the entire day, given the powerful combination at the open of concentrated volume and high uncertainty following the overnight or weekend non–trading period. The authors examine the process of price discovery at the New York Stock Exchange single–price opening auction. The analysis sheds light on the role of the specialist and provides insights into how openings on other markets–such as Nasdaq–might be structured. In particular, the presence of designated dealers facilitates price discovery over an automated call auction market, perhaps because specialists obtain valuable information by observing the evolution of the limit order book. In addition, the specialist's opening trade reflects non–information factors such as price stabilization requirements. Finally, the authors note that it is not feasible to trade thin stocks in call markets without either the presence of a designated dealer or a high degree of transparency.